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Foreword

This document provides general information only.  Every effort has been made to ensure that the information is accurate, but it is not a full and authoritative statement of the law and you should not rely on it as such.  The Insolvency Service cannot accept any responsibility for any errors or omissions as a result of negligence or otherwise.

The Insolvency Service has revised this booklet for the guidance of insolvency practitioners (IPs) in dealing with claims under the insolvency provisions of the Employment Rights Act 1996. Further information is available from our Redundancy Payments Offices (RPOs) listed in Appendix 2. If in doubt, you should seek your own independent legal advice.

The Secretary of State for Business, Innovation & Skills (BIS) is responsible for making payments from the National Insurance Fund (NIF) under the insolvency provisions of the 1996 Act. Our RPOs carry out this function on behalf of the Secretary of State, operating to the standards published in the Insolvency Service Charter. These standards focus on the speed and accuracy of payments and on responding promptly and courteously to enquiries. They are set out on the following website address: http://www.insolvencydirect.bis.gov.uk/information/guidanceleaflets/charter/charter.html

As an IP, you have specific responsibilities under the 1996 Act. These are different from, though closely related to, your statutory duties under insolvency legislation in the administration of the affairs of insolvent employers and the assessment of claims of creditors, including employees. You play a vital role in the system.

Close co-operation between IPs and RPOs is essential for the system to operate effectively.

RPO managers are happy to talk to you about any problems, whether on specific cases or general procedures, and may be able to help with training IP staff new to this work.

Contents

Part1 - Scope of the provisions

1. Outline

Under the part 12 of the 1996 Act, RPOs pay certain entitlements (within limits) owed to former employees of insolvent companies.  This legislation, which implements the EU Insolvency Directives 80/987/EEC and 2002/74/EC, guarantees a basic minimum payment to employees of insolvent employers, as they would otherwise have to wait some considerable time for payment, or get no payment, as creditors in the insolvency proceedings.  Outstanding contractual debts remain listed in the insolvency and may become payable only if the sale of a company’s assets realises enough money.  Employees may also be entitled to redundancy pay under the separate provisions of part 11 of the 1996 Act. After they have secured this pay, the employees’ rights and remedies in respect of these debts transfer to the Secretary of State. The claims for basic minimum payment and redundancy payment (but not for pensions) are paid direct by the RPO to the employees.

Employees must claim directly to you, as the IP, for debts that fall outside the scope of section 184 of the Employment Rights Act 1996. The RPO has no involvement in such payments.  Similarly, if a director’s claim for wages etc. is not paid from the NIF, you may admit the claim directly in the insolvency.

2. Definition of insolvency

The insolvency provisions of the 1996 Act apply only when an employer has become legally insolvent as defined in section 183 of the 1996 Act. The RPO has no discretion to make insolvency payments in any other circumstances. The table in appendix 1 shows the categories of insolvency included in the statutory definition and the dates when each becomes effective under the 1996 Act.

3. An insolvency practitioner

As an IP (referred to in the 1996 Act as a ‘relevant officer’), you are the person appointed to deal with an employer’s insolvency, that is:

·          a trustee in bankruptcy or, in Scotland, a permanent trustee;

·          a liquidator;

·          an administrator;

·          a receiver or manager;

·          a trustee under a composition or arrangement between an employer and his or her creditors, including the supervisor of a voluntary arrangement proposed for the purposes of, and approved under, the Insolvency Act 1986;

·          a supervisor of a Company Voluntary Arrangement;

·          a trustee under a trust deed executed by an employer for his or her creditors;

·          the Official Receiver acting as provisional liquidator or interim receiver.

You have specific responsibilities towards creditors (including, where appropriate, employees) under insolvency legislation. You also have a statutory responsibility under Section 187 of the 1996 Act to provide the Secretary of State on request, as soon as is reasonably practicable, a statement of the amount of any unpaid debt owed by the insolvent employer to any employee who is seeking payment from the Secretary of State.

Responsibility for making payments under the 1996 Act rests with the Secretary of State.  Acceptance of debts in an insolvency lies with you, the IP. The RPO must be satisfied of the insolvent employer’s liability for payment before it will pay a claim. It will not automatically pay even if you are prepared to admit the claim in the insolvency or have agreed the amount or status of the claim with the employee. 

4. People excluded from the provisions

Certain categories of workers are excluded from the insolvency provisions of the 1996 Act. These are:

·          self-employed;

·          share fishermen;

·          merchant seamen;

·          employees who normally work outside the UK, unless they have enough connection with the UK to bring themselves within the scope of the ERA. This will involve consideration of, amongst other things, the employee’s contract of employment, and where the employee was paid, taxed and received any benefits.

Employees who do not qualify to be paid from the NI Fund may be paid directly from the insolvency.

5. People covered by the provisions

To qualify for insolvency payments, an applicant must be an employee as defined by the 1996 Act. The term “employee” means an individual who has entered into or works (or worked) under a contract of employment. The Act defines a contract of employment as “a contract of service or apprenticeship, whether express or implied and (if it is express) whether oral or in writing”.

People who are partners of a business or engaged as independent contractors or freelance agents, and others who work under contracts for services (as opposed to contracts of service) are not covered by the term “employee”.

Whether or not someone is an employee is a matter of law and fact.  The main factors considered significant in determining employee status are:

·          if the individual has a written contract of employment, whether it is consistent with a contract of service;

·          the degree of control exercised by the employer over work done by the worker (master/servant relationship);

·          how the work was done;

·          whether the worker was considered to be part of the business, in the sense that the work done by the worker formed an integral part of it rather than simply provided a service for it;

·          whether the worker's involvement included a share of the profits or a risk of loss;

·          whether the work was done on the worker's own account or for the employer.

6. Claimants whose employee status may be in doubt

The most common atypical workers encountered are:

·          company directors;

·          sub-contractors;

·          freelance workers;

·          agency workers.

If there is doubt, or a dispute, you should consult the RPO for its opinion, as ultimately the decision whether or not to pay a claim under the Employment Rights Act rests with the Secretary of State subject to any ruling by an employment tribunal or court. If you cannot agree with the RPO on the employee status of an individual, the matter will be referred to an employment tribunal to determine.  You may be called as a witness to the hearing.  For guidance on the above categories where problems have arisen in the past, see Appendix 6.

7. Death of an employee or employer

Sections 206 and 207 of the 1996 Act set out employees’ rights if the employee or employer dies.  In either case, action under the insolvency provisions can be begun or continued by (or against) the deceased’s personal representative.

8. Debts payable under the 1996 Act

The following debts can be paid where the employer has become insolvent and the employee’s contract of employment has been terminated:

·          arrears of pay for one or more, but not more than 8 weeks (certain statutory payments are treated as arrears of pay for these purposes);

·          holiday pay for up to 6 weeks in all during the 12 months ending on the date of the insolvency;

·          payment for notice given, or for an employer’s failure to give proper notice, for the period required by section 86 of the 1996 Act;

·          a basic award of compensation for unfair dismissal made by an employment tribunal;

·          reasonable repayment of any fee or premium paid by an apprentice or articled clerk.

All but the last of these debts are subject to a limit on the amount that can be paid in relation to any one week. At the time of printing it is £330.  Please note that the Department for Business, Innovation & Skills (BIS) review this limit annually, usually from 1 February.  For information about the correct statutory limit in force please see the “Employment Matters” page on the BIS website on the following reference: http://www.BIS.gov.uk/employment/employment-legislation/employment-guidance/page19310.html

9. Arrears of pay

The RPO will pay arrears of pay owing from any one or more weeks up to a maximum of 8 weeks. Periods of less than a week from different weeks cannot be totalled to make a single week; they must be treated as separate weeks for the purpose of counting towards the 8-week maximum. The weeks for which arrears are claimed need not be the latest weeks of employment, nor need they be consecutive. They may fall at any time before the appropriate date (see paragraph 20) and should be the 8 weeks that are financially most beneficial to the employee. (“Week” for these purposes is defined in section 235(1) of the 1996 Act.)

The statutory limit applies to the gross debt, before deduction of basic rate tax, ERNIC etc. It must, where appropriate, be applied proportionately to part weeks. Arrears of pay may include the following:

·          unpaid wages (or unpaid portions of wages), overtime, bonuses and commission, provided that these were contractually payable and that they relate to a specific period of time;

·          amounts deducted for union dues but not paid over – these must be paid to the employee, not to the union;

·          deductions from wages under an attachment of earnings order not paid to court

·          certain statutory payments to which the employee is entitled, such as:

·          payments for time off in specified circumstances;

·          remuneration where the employee is suspended on medical or maternity grounds;

·          payment under a protective award made by a tribunal;

·          guaranteed payments for temporary lay-off.

If a claim comprises more than one of these elements, you should bear in mind that the limit applies to the total claim for a particular week, not to individual elements of it. You can find detailed guidance on the calculation of a week’s pay and the application of the weekly limit in appendix 3.

10. Holiday pay

The RPO will pay any holiday pay owing, up to a maximum of 6 weeks, provided the employee became entitled to it during the 12 months ending with the appropriate date (see paragraph 20). Holiday pay includes pay for holidays already taken and holidays accrued but not yet taken. 

The limit on the amount payable in respect of any one week applies in all cases and must be apportioned as necessary (see Appendix 4).

The working time regulations provide a basic statutory minimum holiday entitlement but some employers give a greater contractual entitlement to holidays.  These are not two separate entitlements – the contractual entitlement is used to satisfy the statutory requirements and vice versa.  However, an employee can take advantage of whichever right, in any particular respect of the holiday entitlement, is the more favourable.

The statutory holiday entitlement will be increased to 4.8 weeks from 1 October 2007 and to 5.6 weeks from April 2009.  For information about how to calculate entitlement please see the Department for Business, Innovation & Skills (BIS) website on http://www.BIS.gov.uk/employment/holidays/index.html which includes a ready reckoner for calculating holiday entitlement.  Please note that the Working time Regulations provide the minimum statutory entitlement and that any contractual entitlement counts towards satisfying those requirements. 

11. Compensatory notice pay

The RPO can pay the amount, subject to the statutory limits, which the employer was liable to pay the employee for the minimum period of notice required by section 86 of the 1996 Act or for his failure to give that period of notice. The statutory minimum periods of notice are:

·          one week for employees continuously employed for one month or more but less than two years;

·          one week for each year of continuous  employment of two years or more but less than 12 years;

·          12 weeks for 12 or more years of continuous employment.

Employees who work under fixed-term contracts that specify the duration of employment may not require any notice of termination. No right to notice is imported into such contracts by section 86 of the 1996 Act. However, if a fixed-term contract does allow early termination where the employer gives notice, section 86 may apply. You can find more detailed guidance to the notice provisions at:  http://www.BIS.gov.uk/employment/employment-legislation/employment-guidance/page18474.html

If an employer gave an employee notice but, because of the insolvency, the employment actually terminated before the notice period expired, the periods before and after the termination should be dealt with differently.  An employee’s notice period starts the day after he or she is given notice.  If no notice is given it starts the day after he or she is dismissed.  If the employee worked all or part of the notice period but was not paid for it, the claim is paid as if it was wages and will be subject to basic tax and national insurance, however, the period does not count toward the limit of 8 weeks’ arrears of pay as it is attributable to the number of weeks notice due. The IP should make this quite clear on the RP14.  Pay for the balance of the period that relates entirely to the period after termination should be claimed as notice pay; it should be assessed and paid as damages for breach of contract.  Please ensure that the RPO is notified of any such cases in writing.

An employer who fails to give the minimum statutory notice is liable to pay damages for wrongful dismissal. Such damages are subject to mitigation, as is an employee’s entitlement to notice pay under the insolvency provisions. Income received by the employee will be offset against any notice pay due from the insolvent employer. The employee must take all reasonable steps after the dismissal to minimise his or her loss by finding another job or by claiming the statutory benefits to which they may be entitled. If an employee has failed to take these steps during the notice period, the RPO may reduce the amount of the notice payment.

If an employee gives notice of termination to the employer and is then dismissed before the end of the notice period, you should ignore the employee’s notice period in determining the statutory notice that the employer must give.  This is because it is the employer that actually terminates the employment.  However, one of the qualifying conditions for payment is that the employee must be “ready and willing to work during the notice period, even though there is none available”.  This means that for the purposes of notice pay you should count only the period from the termination date to the end of the notice period given by the employee. 

12. Basic award of compensation for unfair dismissal

An unpaid basic award of compensation for unfair dismissal made by an employment tribunal is payable in full. A compensatory award is not payable.

13. Reimbursement of apprentices’ or articled clerks’ fees and premiums

The RPO may pay a sum that it considers reasonable to reimburse the fee or premium for the unexpired term of the apprenticeship or articles.

14. Protective award

Payment due to an employee under a protective award made by an employment tribunal under section 189 of the Trade Union and Labour Relations (Consolidation) Act 1992 is payable, within limits, under the insolvency provisions. It is treated for these purposes as arrears of pay. A tribunal making a protective award must specify:

·        the number of days in the protected period – which should not exceed 90;

·        the start date of the protected period – this is the date of the first of the dismissals being complained about or the date of the award, whichever is the earlier;

·        the description of employees covered by the award.

The Secretary of State will not have been a party to the tribunal proceedings. Therefore, on receiving the tribunal’s decision you should send a copy to the appropriate RPO, with a list of names and addresses of the relevant employees. You also need to send a list of the names and address of the employees to the Local Jobcentre Plus as directed by the recoupment of Jobseekers allowance regulations.  The Jobcentre is responsible for lodging a claim for the Jobseekers allowance paid during the protected period, with the exception of the period paid by the RPO.  You should also check that all the bulleted items listed above have been included in the decision. If any of these has been omitted, it may be impossible to calculate the payments. In such cases you should contact the RPO immediately for advice, as the parties may have to apply for a review of the tribunal’s decision.

Occasionally a decision is worded so as to apply only to union members. This is wrong in law, as the 1992 Act does not discriminate against non-union members – “union member” is NOT a description of employee.  You should advise any excluded ‘description’ of employees who think they should be covered by the award to apply directly to an employment tribunal under section 192 of the 1992 Act, as this is the only legal means to resolve the exclusion.

The RPO calculates the awards and sends the payments direct to the employees.

15. Redundancy pay

Under separate provisions of section 168 of the 1996 Act the RPO can also pay any statutory redundancy pay to which an employee is entitled. The redundancy payments provisions are outlined in the booklet “Redundancy Entitlement – Statutory Rights” (PL808), available on the “Employment Matters” page on the BIS website on the following reference http://www.BIS.gov.uk/employment/employment-legislation/employment-guidance/page15686.html

You can find basic information about redundancy entitlement where an employer is insolvent in the booklet “Redundancy and Insolvency – A Guide for Employees” (which also includes a tear-off RP1 claim form). You can get this booklet free of charge (see Appendix 2). For general enquiries about entitlement to these payments, call the help line (see Appendix 2).

This information includes the changes made under the Age legislation, which came into force on 1 October 2006.  The main points are:

·          Removal of the lower and upper age limits of 18 and 65

·          Removal of age tapering in the year before retirement age 64

·          Removal of optional occupational pension offset against redundancy pay.

16            Statutory maternity and sick pay

For enquiries about entitlement to statutory maternity pay, please contact Her Majesty’s Revenue and Customs (HMRC) as it has responsibility for maternity pay.  Contact your local tax office for assistance, or its helpline for experienced employers on 08457 143143.

For enquiries about statutory sick pay, contact the Department for Work and Pensions (DWP) as this is its responsibility.  http://www.dwp.gov.uk/lifeevent/benefits/statutory_sick_pay.asp Please contact your local Jobcentre Plus for information, or of disputed payment contact HMRC on the above number.

17. Unpaid pension contributions

As well as making payments to employees, the RPO may make payments to pension funds where the employer has failed to pay contributions due on his or her own behalf or the employees. Arrangements for such payments are described briefly at appendix 7 and more fully in a separate leaflet IL2 “Insolvency of Employers: safeguard of occupational pension scheme contributions”. You can get this booklet free of charge - see appendix 2.

18. Claims in the insolvency

Payment by the RPO does not prejudice the right of any employee to seek recovery of any other debts, or debts in excess of the statutory upper limits, from the insolvent employer’s assets in the usual way. Nor does payment by the Secretary of State imply that you, as IP, are bound to admit a claim by the employee, or the Secretary of State’s subrogated claim, which you do not think is valid under insolvency legislation. If, before payment is made from the NIF, it becomes apparent that you do not agree that the employee is entitled to payment and would not accept the claim in the insolvency, the RPO would reject the claim and refer the matter to an employment tribunal for a legal ruling on the validity of the claim against the employer.

19. Retained employees

If you keep employees at work after the date of insolvency, you should pay wages for that period out of the funds of the insolvent employer, which you are entitled to use to continue necessary services. You must ensure that no claims for wages for periods after the insolvency date are made under the insolvency provisions if the employees are later dismissed. Wherever possible, you must give retained employees proper notice of the eventual termination of their employment, to reduce the debt against the employer and the burden on the NIF.

20. The appropriate date

The RPO has the power to pay only the debts that are due and unpaid on the “appropriate date”, defined as:

·          in relation to arrears of pay (except remuneration under a protective award) and to holiday pay, the date on which the employer became insolvent;

·          in relation to remuneration under a protective award or to a basic award of compensation for unfair dismissal, the latest of :

o       the date on which the employer became insolvent;

o       the employee’s termination date; and

o       the date on which the award was made;

·          in relation to any other debt, whichever is the later of:

o       the date on which the employer became insolvent;

o       the employee’s termination date.

21. Claimants right to complain to an employment tribunal

An employee who has applied for an insolvency payment has the right, under section 188 of the 1996 Act, to complain to an employment tribunal against the decision of the Secretary of State if:

·          the Secretary of State has failed to make any payment; or

·          the payment by the Secretary of State is less than the amount that the employee considers should have been paid.

The respondent in all such cases will be the Secretary of State.  In general you as IP should not be a respondent, but may be called as a witness in any dispute over entitlement. If the RPO rejects a claim made under the insolvency provisions, it will advise an employee to name as respondent in any appeal the Secretary of State for Business, Innovation & Skills and to give the address of the RPO dealing with the claims. The RPO will also advise the employee to name any other appropriate respondent. For example, the transferee in a case where there was a TUPE transfer.  If you receive a copy of the tribunal claim form ET1 for claims against the employer, it would be helpful if you would inform the RPO if you notice that the Secretary of State has not been named as a respondent rather than ignore the claim.  The RPO can then intervene in the case if needs be.

Part 2 - The procedure

22. Information

Losing a job through the employer’s insolvency can come as a shock, even where the employer has been known to be in financial difficulty for some time. One of the first things employees will want to know is what they are entitled to and how they can get help. The resources that you can make available to help with such queries will vary. In customer surveys employees often complain that they did not receive the relevant explanatory leaflets. Appendix 3 lists the main forms and booklets used.  Please ensure that you issue the complete RP1 & Booklet – A guide for employees on the insolvency of their employer.  Do not tear out the RP1 forms or issue down loaded RP1 forms without the booklets.

23. RPO objective

The RPO’s objective is to ensure that employees receive money to which they are entitled as quickly as possible. The RPO may calculate some individuals’ entitlements sooner than others.  This may be because it has to make extra enquiries, for example for directors, sub-contractors or employees on long-term absence, transfer information. However, the RPO will make every effort to achieve the targets set out in the Insolvency Service Charter booklet. 

In addition to this our Inspectors carry out a random check on 20% of wages records, but they will carry out additional checks where there are specific concerns about the records or the legitimacy of employees claims.  It would assist the Inspectors if you have all the records available for inspection when they visit.

24. The Insolvency Service Charter

The charter outlines what debts can be paid, briefly describes how claims are handled and gives the number of the helpline (see appendix 2), which is there to advise and deal with general enquiries. Please issue a copy to employees.

25. Notification and consultation about proposed collective redundancies

Employers may consult you about putting a company into insolvency before your formal appointment.  At that stage you should recommend that the employer starts the redundancy notification and consultation process immediately so that it is in motion at the time of your appointment. 

You may also wish to advise employers to contact the Jobcentre Plus for assistance for employees facing redundancy.  More information about how the Jobcentre can help is available at: http://www.jobcentreplus.gov.uk/cms.asp?Page=/Home/Employers/HelpwithRedundancies

26. Consultation with employees’ representatives and protective awards

A company’s insolvency does not affect the normal statutory duty to consult appropriate employees’ representatives about proposed redundancies, as set out in section 188 of the Trade Union and Labour Relations (Consolidation) Act 1992. 

Responsibility for conducting such consultation rests mainly with the employer but will fall to you if the employer has not started the consultation process before your appointment.  Failure to carry out the necessary consultation may lead to a protective award for the affected employees and increase the employer’s debt. 

You may not incur a liability against the company if there are special reasons for you being unable to comply with the information and consultation requirements within the statutory time scales.

You should take all reasonable steps to reduce the liability against the company and the NI Fund by taking the relevant action within the time available before the dismissals and defending this action before an employment tribunal.  You can find further information in the booklet “Redundancy consultation and notification PL833”, which is available on the following BIS website: http://www.BIS.gov.uk/employment/employment-legislation/employment-guidance/page13852.html

27. Notification process

An employer proposing to dismiss 20 or more employees as redundant at one establishment within a 90-day period has a statutory duty to notify the Birmingham RPO who acts for Secretary of State for Trade and Industry (section 193 of the Trade Union and Labour Relations (Consolidation) Act 1992). This is so that government departments and agencies and the Jobcentre Plus Rapid Response Service can be alerted and prepared to take any appropriate measures to assist or retrain the employees in question.  Changes to the legislation following the ECJ case in Junk include the requirement to notify the Secretary of State at the Birmingham RPO before any individual notices of dismissal are given.

The notification must be in writing on form HR1, which you can get from the BIS Publications Orderline on 0845 015 0010, or email pubs.unit@BIS.gsi.gov.uk.  You can also download the form from http://www.insolvencydirect.bis.gov.uk/pdfs/rpforms/hr1.pdf

There is a specified time limit for a notification.  The date of notification is the date on which it is received by the RPO.  The minimum times are:

·          at least 30 days if between 20 and 99 employees may be dismissed;

·          at least 90 days if 100 or more employees may be dismissed

An employer who has already notified one group of proposed redundancy dismissals and later decides to make a further group redundant need not add the numbers of employees together to calculate the minimum period for either group.

There is no obligation to notify redundancies of fewer than 20 employees within a 90-day period, but employers may nevertheless wish to consider doing so in borderline cases – particularly if the numbers involved are uncertain.

The notification should be sent by post, fax, email, or delivered by hand to the office stated on form HR1. Employers must also give or send a copy of the notification to the representatives with whom they must consult about the proposed redundancies.

In special circumstances it may not be reasonably practicable for the employer to meet fully the requirements for minimum notification periods. In such circumstances, the employer must take all reasonably practicable steps toward meeting the requirements and explain why they cannot be met in full – it may help to reduce the period for a protective award.

28. Penalty for non-compliance with notification procedure

If an employer fails to give the required notification, and failed to demonstrate any special circumstances for not fully meeting the requirements, the RPO may start legal proceedings that could lead, on summary conviction, to a fine of up to £5,000. (This upper limit is subject to review from time to time.)

29. Issue of claim forms

RP1 is the main application form for payment from the NIF.  It is incorporated as a tear-off in the booklet “Redundancy and Insolvency – A Guide for Employees”.  The whole booklet should be issued to employees as soon as possible after dismissal. The booklet should not be issued to any employees until they have been formally made redundant, or transferred under TUPE 2006. This is because their contract of employment must have officially ended before the RPO can consider making payments. Where employees have left of their own accord and are owed arrears of pay and/or holiday pay, an RP1 can be issued. In these cases the RP14a must state clearly that the employee resigned and the date of the resignation.

Employees should complete form RP1 as soon as possible after dismissal. Some IPs may use a computerised version of RP1 that sets out the relevant information and requires only agreement and signature by the employee. This is acceptable. However, employees must not be asked to sign and date blank forms to be completed later on their behalf. An appointed agent or personal representative may complete an RP1 on an employee’s behalf if the employee needs help in completing the form because of incapacity or illiteracy, or if an employee dies soon after the appropriate date.

RP2 form is the main application for claiming compensatory notice pay. It is computer generated and the RPO will send it direct to employees at the end of their statutory notice period. 

RP13 form is an application for a refund of notional tax deducted from compensatory notice pay and is sent out by the RPO.  

30. Issue of information gathering forms

RP3 form is for more information about office holders in company and is sent out by the RPO.

RP4 is for more information from subcontractors, freelance workers and casuals and is sent out by the RPO.

RP14 Questionnaire is for more information about the company and TUPE transfers (Transfer of Undertakings (Protection of Employment) Regulations 2006 (SI 2006 / 246). IPs should hold stocks of RP14s, as they are required in all cases.  The RPO does not usually make payments without a statement from the IP about whether or not the undertaking of the insolvent employer has been transferred to a new owner.

RP14A is statement of debt owed to employees.  The RPO does not usually make payments without a statement from the IP of the amount of unpaid debt owed to the employees at the appropriate date.  The RP14A is the relevant form for notifying these details. You should hold stocks of RP14As and send one to the RPO before or with the first completed RP1 claim forms.  IP’s who use Turnkey can send in an electronic version.

RP18 form is for more information about TUPE transfers from the transferee or the transferor and is sent out by RPO

RP19 form is for more information about TUPE transfers from an employee and is sent out by RPO.

31. Action on return of completed forms

The employee should return form RP1 direct to the IP, who will verify and forward the claims to the relevant RPO as soon as possible. Checks may be made later by an RPO Inspector or by enquiry from an RPO. Records maintained by the insolvent employer should generally provide enough information from which to check or calculate an employee’s entitlements. All such information must be made available. If the wage records are insufficient, you should discuss the facts of the case with the appropriate RPO to agree how far the claims should be admitted.

32. Completion of questionnaire and statement of employees’ debts (RP14/14A)

The RPO cannot pay debts owed to employees until it is satisfied that their employment has not been transferred to a new employer through the TUPE Regulations and received a statement of debts owed to the employees. Form RP14 is a questionnaire seeking information about whether an undertaking has been transferred as well as general information about the employees and employer’s contractual arrangements.

Please send RP14 and RP14A to the RPO with the first completed claim forms, with a copy of any sale agreement and any other relevant documents. If you submit claims without an RP14, the RPO will send one to you.

If you continue to trade the business of the employer but dismiss employees at various stages, you should not wait until all dismissals have been carried out but should send an RP14 covering the first batch of dismissals and inform the RPO in writing of any change in circumstances for each subsequent batch, particularly about TUPE transfers. In this way the RPO can process without delay claims for any employees who are clearly not covered by a transfer, while investigating claims for other later dismissals that may be covered.

General information about the TUPE regulations and how they can affect claims is set out in Appendix 4. Further information is available at: http://www.BIS.gov.uk/employment/trade-union-rights/tupe/page16289.html

If you are uncertain about the effect of the regulations in a particular case, please discuss this with the appropriate RPO. Any guidance provided by the RPO will be on a “without prejudice” basis. Whether or not the RPO considers that claims are payable in any circumstances, employees have a right to bring claims in an employment tribunal against the transferee employer, if they consider that the regulations apply to them.

33. Set off of debts between employee and employer

Occasionally, an employee will owe money to his or her employer at the appropriate date. In such cases the employee’s entitlement under the insolvency provisions will be the net amount owed after set-off, see the EAT case of Secretary of State for Employment v 1) Wilson & ors and 2) BCCI [1996] IRLR 330. (Income tax and ERNIC, however, are payable on the gross amount owed before set-off.) You must give the RPO full written details of the amount owed to the employer and the gross amounts owed to the employee and attach it to the RP14A. If there is a written agreement between the employer and employee on repayment, you should provide a copy. It is essential that the information be forwarded to the RPO immediately you become aware of it.  Unless you give this information at the outset, the RPO will not be able to initiate the set-off.  You will, therefore, have to pursue the individual for the money owed to the insolvent company. 

34. Attachment of earnings orders

Occasionally an employee may have a court order requiring their employer to make deductions from their wages and pay them directly to the court (or other party).  As the Secretary of State is not the employer, the RPO is not empowered to make deductions and make direct payment to the court.  In such cases you must tell the employee that he or she is responsible for making the payments to the court.

35. Deduction of tax and national insurance contributions by RPO

The RPO will deduct from arrears of pay and holiday pay an amount of income tax at the basic rate in force at the time payment is made. The employee’s share of ERNIC will also be deducted from the payment. The rates of contributions and earnings limits are the weekly rates and limits current at the time of payment, without regard to any previous pay practice. The number of weeks covered by an arrears payment will also be taken into account in assessing ERNIC liability.

36. Subrogated rights

Where an employee is paid from the NI Fund, the RPO acting on behalf of the Secretary of State takes over the employee’s rights to recover that amount of the debt under Sections 167 and 189 of the 1996 Act.  These rights include any right of priority conferred under insolvency legislation.  The RPO has the same rights as the employee to be paid in priority to the employer’s other creditors.  The RPO’s claims must be calculated against the individual employees’ entitlements and not as a gross overall total against the employer. Any sums that the RPO recovers from the employer are repaid to the NIF.  There is no difference in the treatment of statutory or contractual entitlements for subrogation purposes.

37. Lodging the RPO claim in an insolvency

The insolvency provisions of the 1996 Act do not affect the priority given to certain debts by Schedule 6 to the Insolvency Act 1986. This Schedule says that certain payments will be given preferential treatment within the limits that govern such priority. 

Employees’ priority claims are:

·          all accrued holiday pay, that is for holiday not yet taken to which the employee became entitled in the 12 months before the insolvency date;

·          wages up to £800 in the four months immediately before the insolvency date;

·          a protective award is treated as wages.  The period of the award may span the insolvency date.  If so, the period before the insolvency date may be preferential subject to the limit, and the post-insolvency period is unsecured

Other priority claims are certain occupational pension contributions;

·        employees contributions deducted from pay in the four months preceding the insolvency date.

·        employer’s contributions from schemes contracted out of the State earning related pension scheme to the extent of the level by which the NI contribution is reduced in relation to the 12 months preceding the insolvency date.

The RPO will send you an RP11 and RP 12 showing the preferential and non-preferential amounts paid to employees and how the payments were calculated.  A proof of debt letter will also be sent to you stating the total preferential and non-preferential amounts due to the RPO. 

38. Crown Set off

The House of Lords, in the case of Secretary of State for Trade and Industry v Frid (West End Networks Ltd), found that the RPO was entitled to Crown set-off.  The full decision is available on: http://www.parliament.the-stationery-office.co.uk/pa/ld200304/ldjudgmt/jd040513/frid-1.htm 

Set-off applies to both preferential and non-preferential debts.  The Insolvency Act does not give any clear instruction as to how the set-off is apportioned between the two classes of debt; however, this position was resolved in the courts.  The approach is different in England and Wales to that in Scotland (see Appendix 8 for examples of calculations).

The RPO will send a revised proof-of-debt letter to inform you of the set-off, which shows the total amount and the outstanding balances of unpaid preferential and non-preferential debts which will have been adjusted to reflect the amount after set-off.  It should avoid overpayments by you and requests for the RPO to repay dividends.

39. Preferential claims

For preferential claims only, section 189(3) of the 1996 Act states that the employee’s claim and the RPO’s claim must be added together for computing preferential amounts due.  Section 189(4) of the 1996 Act gave the RPO the right to be paid in priority to any other unsatisfied claims of employees (the so-called “super-preference” status), however, this part only of the Act has been repealed for cases where the date of insolvency is on or after 15 September 2003.  From that date the RPO has equal preference with the employee.  However, if the insolvency falls before 15 September 2003, the Secretary of State retains super-preferential status over the claims of employees.

Please take care to separate claims for wages and holiday pay when making preferential dividends, otherwise there is a danger that the employees and the RPO could be under/overpaid.

40. Example of distribution for an employee who was made redundant in June 2002 and the insolvency date is before 15 September 2003

An employee’s gross claim against his former employer is as follows:

·        4 weeks’ wages @ £500 per week = £2,000 (£800 preferential; £1,200 non-preferential)

·        6 weeks’ holiday pay @ £500 per week = £3,000 (all preferential)

·        Total preferential claims = £3,800

Payments to an employee from the NI Fund are limited by statute, and the RPO paid £2,500 of the employee’s claim as follows:

·        4 weeks’ wages @ £250 per week = £1,000 (£800 preferential and £200 non-preferential).

·        6 weeks’ holiday pay @ £250 per week = £1,500 (all preferential)

The RPO takes over the employee’s rights in the insolvency in respect of the amounts it has paid the claimant out of the NI Fund.  For each category of preferential payments, the RPO must be paid in full before the employee receives any balance of the preferential amount due. 

For preferential claims:

·        The total claim is £3,800 made up of £800 for wages and £3,000 for holiday pay.

·        The RPO paid £800 wages and £1,500 holiday pay. 

·        The employee’s remaining unpaid preferential claim is £1,500 holiday pay only. 

If a dividend of 70p in the pound is payable for preferential debts, then the amounts available are £560 for wages and £2,100 for holiday pay. From this, the RPO receives all the £560 available for wages plus the £1,500 it has paid out in holiday pay. The employee would receive no wages but £600 in holiday pay (i.e. the £2,100 available less the £1,500 paid to the RPO). 

41. Distributions where the insolvency date is on or after 15 September 2003

The RPO retains its preferential ranking but no longer has a super-preference status over the preferential claims of employees. The requirement for the RPO to be paid in full before the employee is paid was removed [Employment Rights Act 1996 s 189(4)].  However, the requirement to add together the RPO and employee’s preferential claims and treat them as one debt for the purpose of computing the preferential dividend remains [Employment Rights Act 1996 s 189(3)].  The need for apportionment between the Secretary of State’s and the employee’s preferential claims for wages arises because of the legal requirement for the claims to be treated as one for calculation of preferential debt statutory and the statutory limit on the amount payable, which is £800 on the wages payable in the 4 months immediately before the insolvency date.  Any debts that fall outside of the 4-month period are out of scope for preferential purposes and do not need to be added to the employees gross claim for calculation purposes.  The RPO would expect an amount equivalent to the percentage of the employees gross claim paid from the NIF on behalf of the employer.  For example, if the RPO has paid 25% of the debt then they can expect 25% of the dividend.

Originally it was thought that all claims would need to be apportioned but we discovered there was no need to do so in the following cases.

·          Holiday pay claims.  As there is no limit on the preferential amount that can be claimed for holiday pay, there is no need for apportionment - the RPO can claim the full amount as preferential as can the employee.

·          Wages claims: Apportionment is required only where an employee has a residual claim for wages in the insolvency.  Where the employee has no residual wages claim (RPO paid full debt from NIF) - the RPO can claim the full amount as preferential (subject to the £800 limit on wages).

·          Where the employees gross wages debt (including the amount paid by the RPO) is £800 or less then apportionment will not be required as the ultimate distribution will be the same whether or not apportionment is applied.

·          Any weeks of a protective award that fall after the insolvency date will be out of scope for preference, as they do not fall within the 4-month period prior to the insolvency date.

42. Example of Apportionment of wages

The employee' s gross claim against the employer is £2,000 (£4 weeks at @ £500 within the 4-month limit).

The RPO pays £1240 (4 weeks @ £310)

The employee’s residual claim is £760 (£2,000 less £1240 paid by the RPO).

The RPO has paid 62% of the debt and would therefore expect 62% of the £800 that is available to share between the employee and the RPO (on full dividend), which is £496. The same principle applies to a part dividend also.

Protective awards (PA) are treated as wages under ERA 1996 and Insolvency Act 1986, Schedule 6. The £800 limit on wages will apply to any period of a protective award that falls within the 4-month period before the insolvency date.  Only the gross wages for that period needs to be added to the employee’s gross claim for the calculation of the preferential amount due to the RPO.  Any period of the award that falls after the insolvency date is automatically non-preferential and should not be added to the gross claim to calculate preferential claims.

As a PA payment is made some considerable time after all the other payments, the apportionment of the original preferential wages claims on the RP 11 and RP12 may need amendment as well as the proof of debt form.  However, if the whole of the award falls after the insolvency date then there is no need to re-apportion the claim. 

43. Example 1 of additional PA payment (no re-apportionment)

Insolvency date 11/12/06.

Dismissal date 27/11/06.

PA for 90 days starting on 27/11/06.

8 weeks max on the number of weeks payable from NIF with 4 weeks already paid by RPO (as in above example).

4 more weeks @ £310 payable of which 2 weeks in scope for preference

The revised gross claim is £3,000 (6 weeks @ £500)

The RPO paid £1,860 (6 weeks @ £310) - the residual claim is £1,140.

The RPO percentage has not changed from 62% so no re-apportionment is required.  A revised proof of debt updating the amounts is required.

44. Example 2 of additional PA payment (re-apportionment required):

Weekly rate of pay is £250 and statutory limit is £310

Insolvency date 11/12/06.

Dismissal date 11/12/06.

PA for 90 days starting on 27/11/06 of which 2 weeks in scope for preference and which also overlaps with wages already paid

8 weeks max on wages payable from NIF

4 weeks @ £250 already paid by RPO

4 more weeks @ £250 payable (non-preferential) and 2 weeks @ £60 (top up to limit for 2 overlapping weeks of PA and wages).

The employee’s gross claim for wages was originally £1000 and no apportionment was necessary as the RPO paid 100% of debt and was claiming the full £800 as preferential

Because of the overlapping 2 weeks of the PA and wages the employee now has a residual claim for wages and apportionment is required (2 weeks at £500 - double pay, and the application of the statutory limit of £310 to those weeks). 

The gross claim is £1500 (2 weeks @ £250 and 2 weeks @ £500, which is their ordinary wages plus the PA). The RPO paid £1,120 (2 weeks @ £250 and 2 weeks @ £310 or 4 weeks @ £250 and 2 weeks @ £60 if you prefer).  The employee’s residual claim is £380 (2 weeks @ £190).  The RPO has now paid 74.67% of the debt and would expect 74.67% of the £800, which is £576.  Apportionment is now required.

The gross claim is £1830 (2 weeks @ £305 and 2 weeks @ £610). The RPO paid £1200 (2 weeks @ £290 and 2 weeks @ £310 or 4 weeks @ £290 and 2 weeks @ £20 if you prefer).  The employee’s residual claim is £630.  The RPO has now paid 65.57% of the debt and would expect that % of the £800, which is £524.56.  Re-apportionment is now required to show the adjusted % of the claims.

45. Effect of changes of insolvency type on the calculation of preferential amounts.

·        Administration followed by CVA remains the administration date

·        Administration IMMEDIATELY followed by compulsory liquidation (by court) remains the administration date

·        Administration followed after a gap by a winding up the relevant date would change to the date of the winding up order (in theory it could happen where an administration is a successful rescue but could be wound up by a creditor at a later date.

·        Administration followed by CVL (Transnational Insolvencies only where the Member State with the MAIN proceedings requests conversion into winding up proceedings) remains administration date

·        Administration followed by CVL remains administration date.

·        Provisional liquidation followed by court winding up the relevant date for preferential claims is the date the provisional liquidator was appointed (in such cases the wages, holiday pay may be out of scope as we would not pay until the formal winding up date, which may be more than 4 months after the provisional liquidation.

·        CVL followed by compulsory winding up remains date of CVL

·        Interim receiver in bankruptcy followed by bankruptcy order - the relevant date for preference is the date the interim receiver was appointed.

·        Interim receiver followed by IVA - relevant date is the date the interim receiver was appointed.

·        CVA followed by CVL or compulsory winding up the relevant date changes to that of the liquidation. In a CVA there may not be any strict pecking order for preferential claims - it depends on the terms set by the creditors.  The RPO will assume the normal rankings at the outset when lodging the proof of debt and if the pecking order in the CVA is different in that all claims are treat equally (e.g. 60p in pound for all claims) we would not have to do major amendments to the apportionment calculations as the IP would have our full claim already on which to calculated the dividend.

·        Administrative receivership in tandem with liquidation - these are treated as two separate insolvencies and will have two separate insolvency dates for calculating the preferential claim. The Receiver is appointed over the undertaking and controls all assets subject to the fixed and floating charge (from which the preferential creditors are paid ahead of the floating charge holder). The receiver does not make any distributions to unsecured creditors. The liquidator is in charge of any free assets and will receive any monies left over from the receivership if the chargeholders claims are discharged in full. The preferential date for wages claims and holiday pay would be the date the receiver was appointed. For unsecured debts that pass to the insolvency after the conclusion of the receivership, the relevant date would change to that of the liquidation and any unsecured claims could be converted into preferential claims if they fall within the 4-month qualifying period for the liquidation. Similarly, if the preferential claims could not be paid out of the receivership, they could convert to non-preferential if they fall out side the qualifying period for the liquidation.

For example, a company goes into administrative receivership 21 March 2006, and the employees are dismissed and get PA starting from that date.  It would be non-preferential in the receivership as it is out of scope. The company then goes into liquidation on 21 May 2006. When the receiver passes over the spare cash and unsecured claims, 8 weeks of the PA would convert to preferential because it was in the 4-month qualifying period before the liquidation date.

46. Non-preferential claims

The RPO has no right to be paid in priority to employees in respect of non-preferential debts, whether they are statutory or contractual.  Money due to the employee for preferential claims must NOT be set off against the RPO’s non-preferential claims.

47. Taxation of dividends on taxable payments

Because the RPO must deduct basic rate tax and ERNIC at source, you need not pay any further contributions on the dividend due to the RPO.  However, you should pay basic rate tax and ERNIC on dividends payable directly to the employee.

48. Preferential status of wages paid by a third party

In some cases a bank or other third party may lend the employer money to pay employees wages and make a separate claim in the insolvency (Insolvency Act 1986, schedule 6, part 11). If an employee is still owed wages at the insolvency date despite the advances made by the bank, then the employee has first claim to the preferential payment. How much of the third party’s claim will be preferential depends on how much unpaid wages the employee has claimed in his or her own right.

For example, an employee would have been owed £900 in wages but for an advance of £200 from a bank. The employee’s debt is reduced by £200 to £700.  The maximum preferential amount is £800.   The whole of the employees £700 claim is preferential, leaving £100 preferential payment to the bank. 

The purpose of allowing third party claims to be preferential is to safeguard banks and other lenders who advance money to pay employees when a company is in financial difficulty. There is no case law on the interaction between the employee's claim and the bank's claim or which one takes precedence. In the Insolvency Service’s opinion, the correct procedure is to look at the employee’s unpaid wages debt and if it comes to more than £800 the employee (and SofS) will be preferential and the bank’s claim will be non-preferential.  If the employee’s claim is less than £800, then the bank can claim the balance up to £800,providing the IP is satisfied that it was an advance of wages. 

49. Spectrum Plus Ltd: Floating charge on book debts

On 30 June 2005 the House of Lords handed down its judgement and ruled that the Siebe Gorman type of debentures, which are the kind normally used by chargeholders, create a floating charge, NOT a fixed charge. As such book debt realisations have to be allocated in line with the Leyland Daf ruling.  A joint statement on behalf of the Crown Departments was issued setting out the Crowns position. This statement is available on the Internet at http://www.insolvencydirect.bis.gov.uk/insolvencyprofessionandlegislation/finalspectrumstatement.doc

If money from realisation of books debts has been paid directly to the bank and the bank is refusing to return it to you for distribution to preferential creditors, please inform the RPO dealing with the case, as they will arrange for direct action to be taken against the bank to recover the money.

50. Approving IP Fees

From 15 September 2003 the Inland Revenue and Her Majesty’s Customs and Excise no longer have preferential claims.  The RPO, by virtue of subrogation of employees’ preference, remains a preferential creditor.  This means that the RPO will usually be the largest preferential creditor, so it may be asked to vote on payment of IP fees.  The address to send such requests is the office that is dealing with the employees’ payments (see appendix 2).  A SIP 9 is required in all cases.  The exception is where an IP cannot agree his liquidation fees with the preferential creditors.  In such cases, he/she may decide to draw fees from the floating charge fund in accordance with Rule 4,127(A) (the ‘Ors Scale’). Although a SIP9 is not required it would be helpful to the RPO if you would explain how the fees under the OR scale were calculated.

It was long held that in liquidations that the costs of winding up a company, i.e. the liquidator’s fees, were paid in priority to the claims of preferential creditors and floating chargeholders. (Re: Barleycorn Enterprises [1970] 2 All ER 155,CA.  In a landmark judgment, on 4 March 2004 the House of Lords overruled that decision and decided that funds realised from a floating charge are payable firstly to preferential creditors, secondly to the chargeholder, and then can be allocated to the costs of the winding up in priority to any other claims. (Buchler and another v Talbot and another and others [2004 UKHL 9] that is known as the Leyland Daf case.

The House of Lords decision is now the established law on this and cannot be set aside irrespective of what agreement was made prior to the ruling. The RPD, together with the Inland Revenue and HM Customs & Excise (now one Department called HM Revenue & Customs) has issued a joint statement that sets out the Crown Department’s position. Essentially it says that in ALL cases where fees are outstanding post Leyland Daf the Crown will expect that decision to be complied with. The statement is also on the Internet at the following address http://www.insolvencydirect.bis.gov.uk/insolvencyprofessionandlegislation/policychange/policychange.htm

The Leyland Daf ruling is specifically in relation to assets subject to a floating charge.  If there is no floating charge Leyland Daf does not apply. In such cases the Liquidator can draw his fees in priority to the preferential creditors. Equally, if there are “free assets” – i.e. assets not subject to a charge, the Liquidator can draw his fees from those assets. However, if the “free assets” are insufficient to cover all the fees the balance cannot be taken from the floating charge.

Costs incurred by a Liquidator in carrying out certain functions can be approved.  Those are:

·          The costs incurred in preserving and realising the company’s assets.

·          Dealing with preferential creditors claims.

The liquidator should provide a breakdown of amount of time spent in dealing with these functions and the costs incurred. If this is not shown, or is not easily identifiable from the information received, the RPO will request such before any decision is made on those costs.

Changes to the Insolvency legislation will be introduced to reverse the Leyland Daf judgment and will come into force on 6 April 2008.  It will not be retrospective, so the above provision will still apply during the transitional period.

51. Payment of cheques to the NIF

Please ensure that cheques are made payable to the NIF and sent to: 

Insolvency Service 
Finance Redundancy Payments Team 
Cannon House, 
18 Priory Queensway, 
Birmingham, 
B4 6BS

Please ensure that you quote the RPO case reference number when sending these cheques.

Appendix 1 - Insolvency categories and relevant dates  

 Appendix 2 - RPO addresses  

Helpline

A national help line is available to answer any of your queries. Phone: 0845 145 0004 (all calls are charged at local rates).

Publications

This booklet is only available on the internet and can be down loaded from our website on the following reference: http://www.insolvencydirect.bis.gov.uk/guidanceleaflets/Guides.htm#Information%20about%20redundancy%20procedures

Appendix 3                                                                           RPD forms and booklets  

Appendix 4           

Calculation of a week’s pay and application of weekly limit to payments  

1          A week’s pay due under contract of employment

For unpaid holiday pay or ordinary arrears of pay, the amount due, subject to the statutory weekly limit, is simply the sum due under the employee’s contract for the period in question (see paragraph 9 for details of what is included in claims for wages).

For payments in respect of redundancy pay, notice pay, guarantee payments, payments for time off, and remuneration on medical or maternity suspension, we (the RPOs) have to calculate “a week’s pay” as defined in the 1996 Act.  Please note that overtime pay is not included in calculating the basic weekly rate of pay for working out redundancy and notice pay claims even though is may be payable under arrears of pay.

The method of calculation set out in the 1996 Act depends on whether or not an employee has normal working hours and whether or not his or her pay in normal working hours is liable to vary with the amount of work done.

Most employees have normal working hours established by their contract of employment and any relevant working agreement between the employer and the employees. These should be shown in their written statement of particulars. Hours of overtime are included only if they form part of the employee’s normal working hours. This means not only that an employee is contractually obliged to work overtime but also the employer is contractually obliged to provide it. If an employee’s pay for work done in normal working hours does not vary, for example in the case of the employee paid entirely by an hourly rate or by a fixed wage or salary, then a week’s pay is the amount payable under the contract for the normal working hours at the “calculation date” as defined in sections 225 and 226 of the 1996 Act. Such pay includes any regular bonus or allowance (except expenses allowance), which does not vary with the amount of work done.

If an employee’s pay for work done in normal working hours varies with the amount of work done, for example under piecework systems or when pay is partly made up of performance-related bonuses or commission, the amount of a week’s pay is calculated by averaging the employee’s income from the last 12 weeks worked before the calculation date. Any pay for hours not worked, for example under a guaranteed-week agreement, is left out of the calculation. If no pay was due for any one or more of those weeks, the period is extended backwards to cover the last 12 weeks for which pay was due. If the employee has less than 12 weeks’ service, the weekly rate is calculated using the number of weeks actually worked.  The pay figure to use is the amount shown as earned, whether or not it was paid.  In the absence of wage records to show the amount earned it will be necessary to take into account:

• pay received by others doing similar work for the same or a different employer;
• the expected pattern of working based on the terms on which the job was offered.

To get the weekly rate of pay for monthly paid employees it is first multiplied by 12 to get an annual salary then divided by 365 to get a daily rate then multiplying the result by 7 arrive at a week’s pay.  For example, [£650 x 12 ÷ 365] x 7 = £149.59. 

2            Calculation of accrued holiday pay under contract of employment

Following the recent guidance in the Employment Appeal tribunal case of Yarrow v Edwards Chartered Accountants [2007] UKEAT/0116/07/RN, which relied on the Working Time Regulations 1998 and the case of Leisure Leagues UK Ltd v Macconnachie [2002] IRLR 600, accrued holiday pay should be calculated on the basis of a ‘working’ year rather than a 365 day year. 

For further details on how to calculate statutory holiday entitlement is available on the BIS website on the following reference: http://www.BIS.gov.uk/employment/holidays/index.html

On the Businesslink website there is a ready reckoner for calculating holiday entitlement for part years on the following reference http://www.businesslink.gov.uk/bdotg/action/detail?r.s=sl&type=RESOURCES&itemId=1074414822

3.1            Calculation of part of a week’s wages under contract of employment if there are normal working hours

The amount payable for a part week is calculated on the basis of what is reasonable having regard to the employee’s work pattern. If, for example, he or she works the same number of hours each day for 5 days a week and is owed 2 days’ pay, the employee is entitled to ²/₅ of his or her weekly salary (or ²/₅ of the weekly limit, if smaller).

3.2            Calculation of part of a week’s wages under contract of employment if there are varied working hours

If the number of hours worked varies, calculations can more accurately be related to an employee’s normal working hours.  If, for example, such an employee is owed wages for 25 of his or her normal 42 working hours, the entitlement will be ²⁵/₄₂ of his or her weekly wage.

3.3            Calculation of part of a week’s wages under contract of employment if there are no normal working hours

It may consider it necessary to average the number of hours worked over a 12-week period in order to arrive at a fair calculation of the proportion that the part week represents of an average working week. 

3.4            National minimum wage

Where the hourly rate of pay is known to be less than the national minimum wage, the national minimum wage must be used when calculating a week's pay.  These rates are reviewed annually.  For more information, see the BIS website at: http://www.BIS.gov.uk/employment/pay/national-minimum-wage/index.html  

4            Application of weekly limit

The weekly limit is applied, where applicable, to gross debts before deductions, except in the case of a compensatory notice payment, where the limit is applied after mitigation and reduction for notional tax.

Appendix 5                                                                                      

Transfer of Undertakings  

1          The Transfer of Undertakings (Protection of Employment) Regulations 1981 (“TUPE”) were revised and the new regulations, called The Transfer of Undertakings (Protection of Employment) Regulations 2006 (commonly known as TUPE 2006) came into force on 6 April 2006.  The new regulations apply to transfers that take place on or after that date.  See BIS website for full TUPE guidance on the following reference - http://www.BIS.gov.uk/employment/trade-union-rights/tupe/page16289.html

The regulations apply when a business or part of a business is transferred to a new employer as an identifiable economic entity.  The aim of the transfer regulations is to protect employees who are working in an undertaking when it transfers to a new owner, or those unfairly dismissed because the transfer. 

2                    The key reforms are—

·        A wider definition of a ‘relevant transfer’ to include service providers.

·        Clarification of the rule for transfer related dismissals.

·        Change of terms and conditions in limited circumstances.

·        Obligation to notify prospective transferees of employees who are to transfer.

·        Greater flexibility in application to insolvent transfers.

3                    The main provisions of the regulations are—

·        Employees employed at the time of the transfer or who would have been so employed had they not been unfairly dismissed because of the transfer or a reason connected with it, automatically become employees of the new employer, on the same terms and conditions (Reg 4(3)).  The exception is in “relevant insolvencies” (Reg 8(6)) where the restrictions on contractual variations in Reg 4(4) are waived under Reg 9, but only if certain conditions are fulfilled.

·        Employees cannot be forced to transfer against their will, but those who do not wish to be transferred will be deemed to have left of their own accord and will forego entitlement to redundancy payment and compensatory notice payment.

·        Dismissals at any time, which are mainly because of the transfer or a reason connected with it, are considered unfair (TUPE, Regulation 7(1)), unless the reason or main reason for them was an “economical, technical or organisational reason entailing changes in the workforce” (TUPE, Regulation 7(2)).

·        The new employer becomes responsible for all rights, powers, duties and liabilities under or connected with the employees’ contracts of employment, including any outstanding contractual debts such as holiday pay, arrears of salary and notice payments but excluding occupational pension rights. The exception is the sum payable from the NIF where there is a “relevant insolvency” – these do not transfer to the transferee (Reg 8(5)).

·        Appropriate representatives of employees of the transferor and transferee, who may be affected by the transfer or measures taken in connection with it, must also be informed and consulted.

·        The transferor must provide any prospective transferees with details of employees employed in the undertaking to be transferred at least 14 days before the transfer, or if this is not reasonably practicable, as soon a possible afterwards.  Failure to comply with this requirement could result in an ET award of up to £500 compensation per employee if a tribunal upholds a transferee’s complaint.  A copy of this information should also be sent to the RPO with the RP14 form, as it will help to identify those employees who worked in the part of the undertaking transferred to a new owner and save you from making a separate list for the RPO.

4                    Whether or not a transaction amounts to a relevant transfer within the meaning of TUPE depends on the precise circumstances. In general terms, the test is whether there has been the sale or acquisition of a stable economic entity that retains its identity. Examples of transactions that may not count as relevant transfers include—

·        Share transfer.

·        “Asset” only transfers (that is, goods and chattels only).

·        Supply of goods to client.

·        Completion of work in progress only.

·        Administrative functions between government authorities.

·        A ship ceases to be registered in the UK.

5                    In 1986 the European Court of Justice set out a number of factors that are to be taken into account in determining whether there has been such a transfer (Spijkers v Gebroeders Benedik Abbatoir CV, 24/85 [1986] ECR 1119 ECJ). This approach is followed by the UK courts (Cheeseman and others (appellants) v R Brewer Contracts Limited (respondents) [2001] IRLR 144. These include—

·        the type of undertaking or business concerned;

·        whether or not the business’s tangible assets (e.g. buildings and moveable property) have been transferred);

·        the value of the business’s intangible assets at the time of the transfer;

·        whether or not the majority of the employees are taken over by the new employer;

·        whether or not the old business’s customers are transferred;

·        the degree of similarity between the activities carried on before and after the transfer, and the period (if any) during which those activities were suspended.

·        The court, however, made it clear that these are all merely single factors in the overall assessment that must be made, and cannot be considered in isolation. What is crucial is whether an ‘economic entity’ is transferred, and this is to be determined on an overall assessment of all the circumstances, no single factor being conclusive either way.

6          The courts have not extensively interpreted the term “economic, technical or organisational (ETO) reasons entailing changes in the workforce”. So the following represents no more than the RPO’s broad view and should not be taken as a definitive statement of the law. In cases of doubt it will be for an employment tribunal to determine the matter on the facts of the particular case.

7          The RPOs believe that where there is a genuine redundancy within the meaning of section 139(1) of the Employment Rights Act 1996, this will be likely to fall within the meaning of “economic, technical or organisational reasons entailing changes in the workforce” (Reg 7(2)). However, not all dismissals that appear to be by reason of redundancy will fall within that Regulation. If, for example, a clause in the transfer agreement required the transferor to dismiss the employees before completion, even if that were held to be a redundancy within the meaning of section 139(1) of the 1996 Act, it would not necessarily fall within Regulation 7(2) because it would not be a reason that related to the conduct of the business. Subject to the warning above, the following may help you decide whether Regulation 7(2) applies—

·        An example of an “economic” reason is where demand for a particular product has fallen so far that the company’s profitability no longer allows so many staff to be employed or where a particular contract for goods or services has been terminated and there is no other work for the staff previously engaged on that contract.

·        An example of a “technical” reason is where the company has been employing staff on manually operated machines and the new employer wishes to use only computerised machinery, for which the existing employees do not have the technical skills or for which fewer employees are needed.

·        An example of an “organisational” reason is be where a company at one location is taken over by another at a distant location, to which it is not practical to relocate the staff.

8          An argument that an employee has been dismissed for an ETO reason will not usually be sustainable if the employee continues to work for the transferee, even if on different terms and conditions; in BISiman v Delabole Slate Ltd ([1985] ICR 546) the Court of Appeal decided that for a change in the workforce within the meaning of the TUPE 1981 Reg 8(2) [now Reg 7(2)] there had to be a change in the numbers of the workforce or, possibly, their job functions which, although involving no overall reduction in the numbers, involved a change in the individual employees who made up the workforce.

9          The regulations have been changed in respect of insolvent transferors in that limited assistance from the NIF will now be given to employees who transfer to the new owner.  The aim is to make it easier to sell the undertaking as a going concern.  Regulations 4 and 7 do not apply to an insolvency where the undertaking is wound up and the proceeds are distributed to creditors (Reg 8(7)), which include Bankruptcy, Compulsory liquidation and Creditors Voluntary Liquidations (CVL).  Regulations 4 and 7 will apply to insolvencies where the purpose is to rescue the business (Reg 8(6)) – known as “relevant insolvency proceedings”.  This includes administration, members’ voluntary liquidation (for ERA 1996 purposes), voluntary arrangements and administrative receivership. Guidance on what is a relevant insolvency for the purposes of and 8(6) can be found on our website on the following reference http://www.insolvencydirect.bis.gov.uk/redundancyandinsolvency/mailtupeguidance.doc  

NB.  Whether a CVL is in or out may be contested by at some future date.  The wording of the legislation is not particularly clear on this and different views have been expressed by different leading legal authorities (Harvey’s Employment Law).

10.            Payments to transferring employees will not be considered unless the employer was insolvent on the date of transfer.  If the business transfers and the transferor becomes insolvent at a later date the employees who transfer will not be entitled to assistance from the NIF.  The meaning of when insolvency proceedings have been opened or instituted (Regs 8(6)-(7)) has been tested in the case of Secretary of State for Trade and industry v Slater & ors [2007] IRLR 928), where the Employment Appeal Tribunal concluded that the commencement of insolvency proceedings must be determined by the formal rules applicable to the relevant insolvency. 

11.       To assist the rescue of all, or part, of an insolvent business, the RPO will pay certain debts owed by the transferor to the employees who go to work for the new owner. 

a) Employees who transfer to the new owner will be paid wages and holidays taken but unpaid up to the statutory limits.  The RPO’s debt will stay with the insolvent company – it cannot be recovered from the transferee (Reg 8(5)).  The transferee will pay the residual contractual debt.  No redundancy pay or notice pay will be paid, as there is no dismissal.  The deemed dismissal (Reg 8(3)) relates only to insolvency payments in Part XII of the Employment Rights Act 1996 and redundancy pay is under Part XI.  Accrued holiday pay will not be paid as at the time of the deemed dismissal they would not be entitled to them and the right to take holidays at some later stage in the holiday year continues with the new owner.

b) Employees’ whose dismissal is transfer related but is for ETO reasons.  They are now considered to be redundant under TUPE 2006 (Reg 7(3)(b)) and the RPO will pay redundancy pay, wages, holiday pay (including accrued holiday pay) and notice pay as usual.  Prior to the changes made in TUPE 2006, any dismissal connected with the transfer, whether ETO or not was classed as unfair dismissal, which meant that the employees had to seek tribunal awards.  Now they can claim redundancy pay through the normal redundancy channels.

c) Employees who are dismissed because of the transfer and there is no ETO reason will be paid wages and holiday pay (including accrued holiday pay).  RP will not be paid, as they were not dismissed by reason of redundancy.  CNP will not be paid as this may form part of the compensatory element of an employment tribunal (ET) award for breach of contract. Employees may make a claim to an ET for an unfair dismissal award and breach of contract (notice pay).  It will be for the ET to determine whether the transferor or transferee is liable to make the payment.  If the transferor is liable then the RPO will pay the basic award (and notice pay if any is awarded).

d) Employees who refuse to transfer will be paid wages and holidays pay.  RP and CNP will be rejected as there is no redundancy and they are treated as having left employment of their own accord.

12.       In order to determine entitlement to payment from the NIF the RPO sends out the RP14 questionnaire for details of the transfer.  This documents asks for a copy of any sale document be sent to the RPO with the form.  Some IP’s are reluctant to provide copies of sales documents on the ground of commercial confidentiality.  I should explain that the RPO (who represents the Secretary of State) has statutory powers to obtain information in respect claims made to the NIF on the insolvency of an employer.  The relevant statutory power is in Section 190 of the Employment Rights Act 1996.  This provides for an employer, or any persons having custody or control of any relevant records or documents to produce them for examination by the Secretary of State.  The written notice is on the RP14 form and a failure to comply could result in a fine.  The whole idea of asking for copies of the documents is to avoid rejecting claims out of hand and going to an employment tribunal, which will require your attendance, with copies of the documents, to explain the matter to the tribunal.  If you have any misgivings about supplying copies of the sales documents please let the RPO know and they will send one of our Inspectors to visit you to read and takes notes of the relevant parts of the sale document before going down the tribunal route. 

Appendix 6                                      

Claimants whose employee status may be in doubt  

1            Company office holders

A company director, and company secretary, is normally classed as an office-holder. But an office holder may also be an employee of the same company. The matter is to be considered on the basis of all the evidence. 

The leading authority is still the Court of Appeal judgment in Secretary of State for Trade and Industry v Bottrill (1999) IRLR 326 which decided that although the shares held by the director (office holder – our insertion) are of importance and could in certain cases be the deciding factor, all the circumstances of the relationship between the director and the company must be considered to establish whether the relationship is the same or sufficiently similar to that of “ordinary” employees to make the director an employee of the company.

The points a tribunal may wish to consider are:

• Is there a genuine contract between the company and the shareholder?
• How and for what reason did the contract come into existence?
• If the contract is not a sham, does it give rise to an employer/employee relationship?
• Of the various factors usually regarded as relevant, the degree of control exercised by the company over the shareholding individual is important.
• Whether there are other directors other than or in addition to the shareholding individual.
• Whether the company’s constitution gives rights such that he is answerable only to himself and incapable of being dismissed.
• If he is a director, is he able under the articles of association to vote on matters in which he is personally interested?
• The actual conduct of the parties under the terms of the contract.

A decision that an office holder is not an employee for the purposes of the Employment Rights Act 1996 does not prevent the person being classed as such for the purposes of other legislation, e.g. tax or social security legislation.  

2            Temporary agency worker

As we all know ‘Employee Status’ is a movable feast. This is particularly so with agency workers. For the time being at least the authorities are clearly stating that 99 times out of 100 the ‘temps’ are not employees of the employment agency. There does not seem to be any definitive ruling as to whether they may be employees of the client/end user. 

The Court of Appeal, in the case of Dacas v Brook Street Bureau (UK) Ltd [2004] IPLR 358, held that a temporary worker was not an employee of the agency.  It did question whether a temporary worker could be an employee of the client but made no legal ruling on this.   

In the case of Cable & Wireless plc v. Muscat CA [2006] IRLR 354 the ‘temp’ was not found to be an employee of the agency but was found to be an employee of the client/end user. The circumstances of this case are different in that Mr Muscat had originally been an employee of the client and the instigation of that client was told to supply his services through an agency. Other than receiving his salary through the agency from then onwards, nothing had changed from when he had first started with the client as an employee. The Court of Appeal, in our view, rightly decided that you couldn’t take somebody’s employee status away simply by changing the pay-roll provider.  This case can be distinguished from the Dacas and James cases in that they had been treated as agency workers from the outset.  

In the case of James v. Greenwich Council [2006] UKEAT 6/06 the ‘temp’ worked for the client for 5 years. It seems she claimed to be an employee of the client using the side comments made in the DACAS case. The EAT; again, found her not to be an employee of the agency. It also found her not to be an employee of the client, ruling that the length of an assignment will not automatically make someone an employee of the client unless there are other factors that point to there being an employer/employee relationship (as in Cable & Wireless).  

In light of the case law it is highly unlikely that an agency worker would be classed as an employee of an employment business. It is also unlikely that he/she would be classed as an employee of the client/end user.   This means that they should claim directly in the insolvency for debts owed. 

3            Subcontractors, freelance and casual workers

Sub-contracting, though commonly associated with the building trade, covers a wide range of industries and occupations. Those sub-contractors who are clearly in business on their own account and who provide services to several different customers, are generally easy to identify. 

However, many individuals may have been considered by a business to be self-employed, but their working relationship suggested that they were, in fact, employees of the business within the meaning of the 1996 Act.  In determining employee status the balance of all relevant factors must be taken into account.  To be considered are mutuality of obligation, control and other factors such as:

·        was the individual free to accept or refuse work for the contractor;

·        did he or she work under any express contractual arrangements, and if so was it a contract of employment;

·        what were the arrangements (if any) for supervision of the work, holidays, sickness and pensions;

·        did the individual have to carry out the work personally or could they hire or supply someone to do it on their behalf?

·        whether the worker’s involvement included a share of the profits or a risk of loss;

·        whether the work was being done on the worker’s own account of for the employer;

·        basis of payment - was the individual paid a regular weekly wages into his or her personal bank account or paid into a his or her business account on the completion of a task.  

The basis on which the individual paid tax and national insurance contributions and the label put on the relationship by the parties are factors to be taken into account, but neither will itself determine the issue.  

Only “employees” as defined by section 230(1) of the Act are entitled to payments from the NIF. The Working Time Directive has a much broader scope and refers to “workers”. Satisfying the definition “worker” does not automatically mean that that person satisfies the definition of “employee”.

Appendix 7                                                              

Unpaid pension scheme contribution 

Section 124 of the Pension Schemes Act 1993 (as amended) provides for the payment of certain contributions that are owed to an occupational or personal pension scheme when an employer becomes insolvent. “Persons competent to act” under the trust deed or rules of a scheme (for example, the trustees) may apply for payment to a scheme.

The following contributions are payable:

·        unpaid contributions on behalf of an employee, i.e. contributions which have been deducted from the pay of the employee, but which have not been paid into the resources of the scheme, up to a maximum of the amount deducted from the employee’s pay in respect of his/her contributions to the scheme during the 12 months ending on the day before the employer became insolvent;

·        unpaid contributions payable by the employer on its own account, to a limit of whichever is the least of:

o       the balance of the employer’s contributions relating to the 12 months ending on the day before the employer became insolvent;

o       the amount certified by an actuary as necessary for the scheme to meet its liability on dissolution for payment of benefits to the employees (this condition does not apply to “money purchase” schemes);

o       an amount equal to 10% of the total pay of the employees concerned for the 12 months ending on the day before the employer became insolvent.

The trustees or administrators of the scheme should apply for payment from the NI Fund on form RP15 enclosing form RP16 (actuarial certificate) if appropriate.  Since the amount payable in respect of the employer’s contributions does not depend on the result of a preferential claim, the completion of form RP16 need not await the declaration of a preferential dividend. You should agree the claim with the scheme’s trustees or administrators, complete Part 2 of form RP15 and send it to the RPO with form RP16 if appropriate. The RPO will make the payment directly to the pension scheme’s bank account or that of the trustee or administrator.  Please ensure that the correct pension scheme reference number is put on the RP15.

Booklet IL2 “Insolvency of employers: safeguard of pension scheme contributions” gives further information.

Appendix 8                                                                                                              

Crown set off

1          Set-off in England and Wales  

“Unit 2 Windows Ltd.”  – Chancery Division (Companies Court) (1986) BCLC 31.

This was a company in liquidation with enough assets to meet the claims of its preferential creditors but nothing to meet those of the ordinary creditors. One of the creditors was the Crown, represented by the Department of Health and Social Security.  The DHSS sought to set off the VAT refund firstly against the non-preferential debt.  The liquidator disputed this, stating it should be firstly set off against the preferential debt.  The Court held that under English law there must be a balancing of accounts in insolvency; the authority for set-off was not intended to benefit any class of creditor at the expense of another; and that the credit should be set off proportionately between the preferential and non-preferential part of the debt.

2            Apportionment of set-off between the two classes of debt

The amount of the debt to which Crown set-off is applied is the total debt lodged by the RPO with the IP.  The apportionment is as follows;

·        Establish the percentage of RPO preferential debt. The calculation should be made to two decimal points.

·        Establish the amount of the Crown set-off using the percentages figure in above.

The balance remaining will be the amount of non-preferential set-off.

3            Example

The total VAT credit available for set-off was £10,000.  Four government departments were together owed £12,000.  The RPD’s portion was £2,000, made up as itemised below:

4          Set-off in Scotland

“Turner v Lord Advocate” - Court of Session (1993) BCLC 1463

In this case the Inland Revenue had set off the total payment against its non-preferential debt. The Receiver challenged this, arguing that it should be set off proportionately between the non- preferential and preferential elements of the debt, as was the position in England. The Court of Sessions ruled that in Scotland the law of compensation applies to set-off – i.e. there is no balancing of accounts, and a creditor can apply the set-off to whichever class of debts is most favourable to him or her.

5            Apportionment of set-off between the two classes of debt

The payment should be set off in the first instance against the non-preferential element of the debt, and any balance remaining against the preferential element.

6            Example

The background is that the total VAT credit available for set-off was £10,000.  Four government departments together had a total of £12,000 owed to them.  The RPD’s portion was £2,000, made up as itemised below:

Appendix 9             Glossary of insolvency and employment rights terms used in the booklet